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G Ltd reports an annual profit of $47500 for the year 31 march 2000.the company uses absorption costing.one product is manufactured, the rover,which has the following standard cost per unit.
$
Direct material(2kg@5/kg). 10
Direct labour (4hr@6.50/hr).26
Variable overheads(4hrs@1/hr) 4
Fixed overheads(4hrs@3/hr) 12
The normal level of activity is 10000 units although actual production was 11500 units.fixed costs were as budgeted.
Inventory levels at 1 april 1999 were 400 units and at the end of the year were 600 units.
What would be the profit under marginal costing??The only difference between marginal and absorption costing profits are due to the fixed production overheads in inventory.
Here the inventory increases by 200 units.
The fixed production overheads absorption rate is $12 per unit.
Therefore the profits are different by 200 x $12 = $2400.
Inventories have increased, therefore absorption costing gives the higher profit and marginal costing the lower.
(I do suggest that you watch the free lectures on this. Our lectures are a complete course for Paper F2 and cover everything you need to be able to pass the exam well.)
In the above question
AC Profit $47500
Change in Inventory 200 x 12 = $2400so MC Profit would be $45100 or $49900
Inventory have increased and so you would add the change in inventory or would you deduct the change?
Please can you clear up my confusion?
Two things:
Firstly, if you want me to answer then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
Secondly, you must watch the free lectures because this is all explained there. If you read my previous reply I actually state that “inventories have increased, therefore absorption gives higher profit and marginal gives lower”.
Profit using Absorption costing is $47500 because inventory increase by 200 then absorption profit would be higher. To calculate marginal costing profit you must reduce the absorption profit by the increase amount. 200×12 = 2400
absorption profit 47500
less increase inventory value (2400)
____________
= Marginal profit 45,100.00If inventory decrease you would do the reverse
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